Spring forecasts 2009-2010: a tough 2009,
but EU economy set to stabilise as support measures take
effect

In the Commission's spring forecast, GDP in the
European Union is projected to fall by 4% this year and to broadly stabilise in
2010. The main factors behind the recession are the worsening of the global
financial crisis, a sharp contraction in world trade and ongoing housing market
corrections in some economies. However, with the impact of fiscal and monetary
stimulus measures kicking in, growth is expected to regain some momentum in the
course of 2010. Labour markets will be severely affected, with the unemployment
rate expected to increase to 11% in the EU in 2010. The public deficit is also
projected to rise sharply, to 7¼% of GDP in 2010, reflecting both the
slowdown and the discretionary measures taken to support the economy, in line
with the European Recovery Plan proposed by the Commission.

"The European economy is in the midst of its deepest and most widespread
recession in the post-war era. But the ambitious measures taken by governments
and central banks in these exceptional circumstances are expected to put a floor
under the fall in economic activity this year and enable a recovery next year.
For this to happen we need to proceed rapidly with the cleaning up of the
'impaired assets' on bank balance sheets and recapitalise banks when
appropriate", said Joaquín Almunia, Commissioner for Economic and
Monetary Affairs.

Global growth turns positive again

The worsening of the financial crisis led to a contraction of global activity
and a sharp drop in world trade and industrial production during the winter. The
economic downturn has swept a growing number of countries along in its wake,
including emerging and developing countries. However, as fiscal and monetary
stimulus measures gain traction and the financial crisis gradually peters out,
global GDP growth is forecast to turn positive again in the second half of 2009.
In 2010, global growth is expected to reach 2%.

Sharp recession in the EU but with an end in sight

The recession that started in the second quarter of 2008 worsened towards the
end of the year, with both the EU's and the euro area's GDP declining by about
1½% (quarter-on-quarter) in the last quarter. Survey and hard data suggest
a further deterioration in the first quarter of this year. All Member States are
affected by the downturn, although their prospects vary depending on their
relative exposure to the financial crisis, housing-market dynamics and degree of
openness.

As financial markets stabilise, investor confidence improves and both fiscal
support and monetary easing gradually feeds through to real activity, the fall
in GDP is set to level off towards the end of this year and growth rates should
turn modestly positive during 2010.

The downswing is affecting not only all Member States but also almost all
demand components. Private investment is particularly hit, reflecting depressed
demand expectations, a sharp fall in capacity utilisation and still tight
financing conditions. Similarly, exports have contracted sharply in light of the
marked drop in world trade. While private consumption is still holding up
relatively well, helped by lower oil prices and lower inflation, real disposable
income is likely to be dampened by a progressive deterioration in the labour
market. Only government consumption and public investment will contribute
positively to growth this year, thanks partly to the budgetary stimulus measures
taken under the EU Recovery Plan.

Labour market and public finances hit hard

European labour markets began cooling in the course of last year, with their
usual time lag behind the economic slowdown. Looking ahead, employment is
expected to contract by about 2½% in both the EU and the euro area this
year and by a further 1½% in 2010, resulting in about 8½ million job
losses for the two years, in contrast to the net job creation of 9½ million
during 2006-08.

Public finances are also being hit hard by the recession, with the budget
deficit set to more than double this year in the EU (from 2.3% of GDP in 2008 to
6%) and to increase further in 2010 (to 7¼%). The sharp deterioration in
the overall fiscal position is in part due to the economic slowdown itself, as
automatic stabilisers are relatively large in Europe, but it also reflects the
sizeable discretionary budgetary stimulus to support economic activity.

Inflation very low, temporarily

Inflation has fallen sharply in recent months and is projected to continue to
do so during the second and third quarter of this year, due to further base
effects, a weak economic outlook and an assumed decline in commodity prices.
Overall, HICP inflation is projected to be slightly lower than 1% in the EU (and
½% in the euro area) in 2009, and to reach a trough in the third quarter in
both regions. As base effects of past hikes in energy and food prices drop out
of the annual rate this autumn, HICP inflation is expected to gradually pick up
to about 1¼% next year.

Considerable uncertainties remain

With the global economy facing its worst recession since the World War II,
the economic and inflation outlook is subject to considerable uncertainty. The
risk of a worse-than-expected outlook hinges in particular on the impact of the
financial crisis and the strength of the feedback loops between different
sectors of the economy. On the other hand, fiscal and monetary stimulus measures
might be more effective than anticipated in restoring stability and confidence
in financial markets and supporting economic activity. Risks to the inflation
outlook appear balanced this year, stemming from possible developments in
commodity prices as well as price- and wage-setting behaviour.